RBI: Farmers and Small Businesses Can Use Gold, Silver as Loan Collateral

The Reserve Bank of India (RBI) has clarified that banks are allowed to take gold and silver as security for loans given to farmers and small businesses (MSMEs). This is possible even if the loan amount falls under the collateral-free limit. However, this is only allowed if the borrower offers the gold or silver willingly.

In a circular released on Friday, July 11, the RBI stated that this practice does not violate the existing rules for collateral-free loans in agriculture and MSME sectors. The RBI explained that banks can approve loans when borrowers voluntarily pledge their gold and silver, up to the permitted collateral-free limit.

Earlier Instructions

This clarification refers to instructions issued earlier in December 2024, which focused on improving the credit flow to agriculture and included guidelines in the Master Direction on lending to MSMEs.

The rule covers all scheduled regional rural banks, commercial banks, small finance banks, state co-operative banks, and district central co-operative banks. But it’s important to remember that the collateral-free loan rules are not applicable to regional rural banks and co-operative banks.

RBI Pushes for a Unique Borrower Identifier

In a separate announcement, the RBI emphasised the need to introduce a unique borrower identifier across the entire financial system. This would help solve the ongoing problems with accuracy in credit data and avoid duplication.

During a keynote speech at TransUnion CIBIL’s Credit Conference, RBI Deputy Governor M Rajeshwar Rao explained that having a consistent and secure borrower ID is essential for improving the credit information framework in India.

Also Read: EMI Planning: ₹5 Lakh or ₹7 Lakh Loan? Check the EMI Burden Before You Decide!

Existing Problems in Credit Reporting

Currently, Credit Information Companies (CICs) depend on banks and other credit institutions to provide accurate and verified borrower details. Because there is no unified borrower ID, mistakes and duplication in data continue to create challenges for lenders. This can lead to problems when banks assess creditworthiness or make lending decisions.

Conclusion

The RBI’s clarification makes it easier for farmers and small businesses to use their gold and silver assets to get loans, giving them more flexibility. At the same time, the central bank’s push for a unique borrower identifier shows its focus on building a more reliable credit reporting system in India. This combination of measures could help improve access to finance while reducing errors in credit records.

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